Scheme of Amalgamation: Leeway on Appointed Date and Effective Date

[The
following guest post is contributed by Bhavika
Gohil
, who is working with a multinational consulting firm in Mumbai]
The Madras High Court by way of its
order dated 6 June 2016 (accessible through Judis) permitted
petitions filed by Equitas Micro Finance Limited (“Transferor Co. 1”), Equitas Housing Finance Ltd. (“Transferor Co. 2”) and Equitas Finance
Ltd. (“Transferee Company”) (“the Companies”) with leeway to the companies
to fix the appointed date and the effective date. Further, there was no express
mention of the share-exchange ratio in the scheme and the scheme inter alia specified the ratio being
arrived at based on the book value of the shares of the Transferor Co. 1 and
Transferor Co. 2 as on the effective date.
Background
Petitions
seeking sanction of the Scheme of Amalgamation (“Scheme”) of Transferor Co. 1 and Transferor Co. 2 with the
Transferee Company were filed with the Hon’ble High Court of Judicature at
Madras.
The
Companies are subsidiaries of a company by the name of Equitas Holdings Limited.
The holding company had applied to the Reserve Bank of India (“the RBI”) for grant of in-principle approval
to establish a Small Finance Bank (“SFB”).
The RBI granted an in-principle approval subject to certain conditions which, inter alia, required the amalgamation of
the Transferor Co. 1 and Transferor Co. 2 with the Transferee Company to be
effected prior to the commencement of business of the SFB.
It
is in this context that the Companies took steps for bringing about the amalgamation
of the Transferor Co. 1 and Transferor Co. 2 with the Transferee Company. Towards
this, Companies proceeded to secure consent of its shareholders and creditors.
Upon
notice being filed with the Regional Director (“RD”) in the aforesaid matter, the RD raised the following
concerns:
(a)           The first concern was that, the Scheme
did not fix the “appointed date”, and that, its definition was tied in with the
definition of the “effective date”. Further, the effective date was defined to be
the working day immediately preceding the date of commencement of business of
bank by the proposed SFB. A concern was also raised that there was no clear
date fixed in the Scheme, which would work as the effective date;
(b)           The second concern expressed was with
respect to the share-exchange ratio being arrived at based on the book value of
the shares of the Transferor Co. 1 and Transferor Co. 2 as on the effective
date; and
(c)           The last concern pertained to the provision
in the Scheme which envisaged dissolution of the Transferor Co. 1 and Transferor
Co. 2 on the 30th day of the effective date.
Observation of
the Court
It
was argued by the Counsel representing the Companies that the Scheme was so
crafted keeping in mind the in-principle approval granted by RBI for establishing
the SFB.
The
Court observed that the in-principle approval for commencing SFB business was based
on an assurance that the merger of Transferor Co. 1 and Transferor Co. 2 with
the Transferee Company would take place prior to the matter being taken up for
grant of a banking licence. It was further observed that there was no assurance
that a banking licence would follow if, for any reason, the RBI came to the conclusion
that all formalities and conditions stipulated by it do not stand fulfilled. It
was in these circumstances that the Scheme could not provide a clear appointed
date or fix a share exchange ratio. The amalgamation of the Transferor Co. 1
and Transferor Co. 2 with Transferee Company was dependent on the issuance of a
banking license by the RBI and, in turn, the issuance of license was dependent
on the Court sanctioning the Scheme.
The
Court further observed that Section 394 of the Companies Act, 1956 provided leeway
to the Companies to draft the Scheme in such manner and sanctioning of a
compromise or arrangement did not necessarily fetter the Court from delaying
the date of actual amalgamation/merger of entities.
Epilogue
The above judgment would encourage
companies to consider formulating schemes having appointed as well as effective
dates conditional upon happening / non-happening of certain events. This leeway
however, can be exercised only until sections 391-394 of the Companies Act,
1956 are in place as the merger provisions under the Companies Act, 2013 (specificatlly
section 232(6)) require companies to make an explicit mention of appointed date
in the scheme.

– Bhavika Gohil

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

2 comments

    • @Karan Yes, we can have a future appointed date. there is no bar in the regard. However, one may able to justify the reason for fixing such date as it may be questioned by any authority (ROC, OL ,RD and/or NCLT) during the process.

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